Out-Law / Your Daily Need-To-Know

Out-Law Guide 2 min. read

Financial products and bank ring-fencing

This is one of a  series of guides  on issues connected to ring-fencing and banking reform faced by banks. Other guides cover issues such as tax, employment, issues for directors, real estate, pensions, litigation, third party contracts and competition considerations.

This guide was last updated in December 2013

The imposition of a ring-fence will create a raft of issues for UK banks in respect of the products that they currently distribute, as well as those they are developing in an evolving regulatory environment.

First and foremost, banks will need to decide which product portfolios need to stay within the ring-fence depending on the attributes of their customers and whether they come within the appropriate parameters for customers of ring-fenced banks. It may well be that banks will need to split their current product portfolios depending on these parameters and establish 'twinned' systems of portfolio management and operations to run their business lines which are effected in this way.

Another issue requiring attention is the lack of clarity around the treatment of SMEs and high net worth individuals (HNWI) who could at different times fall inside and outside the ring-fence based on averaged annual turnover and deposit sizes respectively.

Banks will need to make transitional arrangements as undisruptive and seamless as possible if they are to maintain - and potentially build upon - existing customer bases. This will not be easy given the different cost bases which will apply to the ring-fenced and non-ring-fenced banks and the impact that this will have on fees and charges. Banks will be mindful of not wanting to create price differentiations between otherwise identical ring-fenced and non-ring-fenced products.

The development of compliance systems and procedures to ensure, for example, that core deposits are accurately maintained will need to be sophisticated and sensitive. The accurate monitoring of the validity of self-certification for corporates and statements of eligibility by HNWIs to allow them to maintain deposits outside the ring-fenced bank will be important.

Where family members of HNWIs are relying on such statements to also maintain deposits outside the ring-fence, should the statement of eligibility expire, such family member deposits will also have to migrate to the ring-fenced bank.

A further issue will be the geographic location of the ring-fence. This may result in certain customers of the bank having to maintain deposits within the ring-fence within the European Economic Area including the UK, whilst having deposits in other locations held in the non-ring-fenced bank.

Finally, limits on the types of products ring-fenced banks may sell, including simple derivatives, will also require a rethink of the business lines which will be available. Whilst limits on the risk of derivatives is sensible in theory, measures to limit the size of their derivatives portfolios will prove harder to manage where it is based on external factors such as the marked-to-market value of underlying assets or the Bank's capital requirement against credit risk for the underlying loans.  

The customer impact

Financial products are likely to be a significant bone of contention given the controversy surrounding past misselling 'scandals'. Banks will need to think carefully about which products they offer, to whom and from what part of the business. Key to the customer experience will be ensuring that there are appropriate levels of communication and understanding with the customer to ensure that the 'right' products are offered to the 'right' people. Customer trust could become severely impaired by any evidence of further misselling after reforms have been introduced.

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